how far could the market go down?

[Noone123]

Forget about the sickness for a second and simply concentrate on the economic impact of the countermeasures. Various economists are projecting the impact of the epidemic on the Chinese economy from 5 to 8% of GDP.

Best case scenario (and we are past that stage) is no other country does anything else and we are left with China alone. China is 20ish percent of the global GDP, so we are talking about 1% to 1.5% reduction in global growth. This is super-optimistic, assumes no knock-on effects etc and it pulls the global growth down 50%. With knock-on effects like the disruption of the supply chains, reduction in travel etc., we are probably talking about a mild global recession. Worst case scenario is that every country is forced to take countermeasures, we have wide economic disruption and are dealing with a global recession of 5%+. Even the best case scenario deserves the markets taking 15-20% hit as they have done historically. Worst case scenario would probably effect the markets in a way similar to the GFC.


If the high school diploma from Bronx Science is the proudest achievement of your career, you must be doing something wrong.

I am not following the math. How did you come up with best case scenario as the market adjusting 15-20%?

 

[Same Lazy Element]

I am not following the math. How did you come up with best case scenario as the market adjusting 15-20%?

Oh, sorry, my bad. The missing variable is the leverage assumption, ie whats 1% of GDP worth in terms of stock market return. I am on a mobile so I can’t look it up but I recall it being around 5x (feels about right for the US at least - average equity return is 9-10%, average growth is about 2%).
So if we assume that growth goes from 2.5 to -0.5 that gives you 15%.

like all macro estimates, it could vary wildly but it’s good enough for back of the envelope answer to “how bad is this shit?”

 

[Noone123]

Oh, sorry, my bad. The missing variable is the leverage assumption, ie whats 1% of GDP worth in terms of stock market return. I am on a mobile so I can’t look it up but I recall it being around 5x (feels about right for the US at least - average equity return is 9-10%, average growth is about 2%).
So if we assume that growth goes from 2.5 to -0.5 that gives you 15%.

like all macro estimates, it could vary wildly but it’s good enough for back of the envelope answer to “how bad is this shit?”

Ok, let's analyze one factor at a time. You are assuming negative growth for all of 2020 as the best case scenario? This is more like the worst case scenario.

 

[murray t turtle]

Bird flu then, but bat flu now. A big difference. NOT a prediction.

I like bats, they are yummy.

https://observers.france24.com/en/2...-bat-soup-debunk-videos-viral-palau-indonesia

Just kidding.

%%
Markets down?? QQQ + DIA are UP on weekly charts. QQQ is also nicely above 200dma. NOT a prediction=trend comment...……………………………………………………………………………………...

 

[Same Lazy Element]

Ok, let's analyze one factor at a time. You are assuming negative growth for all of 2020 as the best case scenario? This is more like the worst case scenario.

Sure. For the mild case, I assume that the epidemic stops in China and there are only economic effects to consider (ie no panic). Given the extent of the shutdowns, I am assuming negative growth in China for the rest of the year and translating that to a flat to mildly negative (basis points, not percent) growth globally. That’s not a bad assumption, considering how interconnected everything is. In my non-expert opinion something like that is very likely at this stage, especially considering the market/public panic and games around the energy markets. For the worst case, I am assuming that other developed economies will institute similar countermeasures to what China did. That could be a very bad situation but I think it’s not very likely.

 

[S2007S]

News out of opec and more cases of the virus will send equities down another 3-5% tomorrow. Volatility could possibly jump to 100+ something that is extremely and extraordinary rare!!!

 

[Same Lazy Element]

Btw, JPM issued a research note that was giving probability of recession based on the recent returns of different assets:
5 year note ~90%
SPX ~50%
Base metals ~60%
IG credit ~40%
HY credit ~30%

 

[KCalhoun]

News out of opec and more cases of the virus will send equities down another 3-5% tomorrow. Volatility could possibly jump to 100+ something that is extremely and extraordinary rare!!!

Right, VIX broke 50 friday, keeping a close eye on it for UVXY trades, plus TVIX small size daytrading... gotta love this volatility

 

[gmal]

I am not following the math. How did you come up with best case scenario as the market adjusting 15-20%?

You can use gordon growth formula

Price = D1/ (r-g) where D1 is next year dividends and r is cost of capital or reqd rate of return and g = growth rate

Rearrange return = yield + growth
In reality, you have to take into change of valuation (multiple expansion or contraction) also, so
return = yield + growth + change in valuation

Current estimated numbers was $175 dividends for SP for next year, keep other things constant and neglect change in valuation for this exercise
When S&P was 3300
Return = 175/ 3300 + 2.5% (growth rate), = 7.8%
Now we are expecting 0.5% slower from the above post, so new price assuming same returns

7.8% = 175/ new price + 2.0%

So new price = 3017

All these are calculations are very sensitive to growth rate. Change in valuation should also more downward pressure since the current valuation is way above trend

 

[Noone123]

Everything at this point is based on many unknowns to baseline assumptions. The closest hard data is from China with 100k cases. Are people seeing China going into a recession? Did you also account for a 1% decrease in interest rate in your assumption? Reality is that at this point, no one could tell 100% how wide spread and bad CV will be in the US. It's too early to have any indication.